Gazing Into the Crystal Ball on Tax Cuts

Today we gaze into our crystal ball and try to divine the future. It looks milky, but one thing is clear: major changes are coming to the U.S. tax code, and they will affect every homeowner and homebuyer in the nation, including those who live or hope to live in New York cooperatives and condominiums. Another certainty is that, whatever form these tax changes take, there will be winners and losers. What’s in it for you? 

For possible answers we turn to CPA Michael Esposito, a partner in the accounting firm of Kleiman & Weinshank, which handles the books of more than 200 co-ops and condos in New York. Esposito has been tracking the various proposals put forth by Republicans in the White House, the U.S. Senate, and the House of Representatives. Before getting into specifics of the various GOP proposals, Esposito offers a general observation: “It appears it will affect mostly the upper and middle class. They’re losing deductions.” 

The loss of deductions would punish residents of high-tax states, including New York, New Jersey, Connecticut, Massachusetts, and California. It’s worth noting that a Democratic senator is running for re-election in 2018 in all five of those states. Now for the current tax landscape and the ways Republicans hope to change it: 

Current tax code: Taxpayers can deduct state, local and property taxes on their federal tax returns, a major relief for homeowners in high-tax states. They can also deduct the interest paid on annual mortgage debt up to $1 million, a cap that can cover multiple homes. Plus, homeowners can deduct up to $100,000 in interest on a home-equity loan or line of credit. 

Senate proposal: No more deductions for local, state or property taxes. The mortgage interest deduction would remain in its current state. 

House proposal: No more state and local tax deductions, though homeowners could continue to deduct up to $10,000 annually on real estate taxes. For people buying a home after Nov. 2 of this year, mortgage interest deductions will be allowed only on loans up to $500,000. Only debt on the primary residence would count toward that limit, and there will be no deductions for interest on home-equity loans or lines of credit. And finally, both the Senate and House proposals would eliminate the Alternative Minimum Tax (AMT), which was instituted in 1969 to prevent wealthy individuals from using loopholes to avoid paying taxes. In 2005, the one year his summary tax information has been made public, Donald Trump had to make an AMT payment of $31 million. 

The repeal of AMT would be a major change. “In reality,” Esposito says, “most New Yorkers, especially in Manhattan, are probably not getting the benefit of their tax deductions because of the AMT. Even though they’re losing deductions [under the GOP proposals], they may be better off because the AMT would be repealed. Depending on where you fall, the impact [of the loss of deductions] may be softened.” 

He adds that some New York City homeowners might not suffer much from a $10,000 limit on deductions for property taxes. “For people in the outer boroughs,” Esposito says, “my guess is not a lot of them are paying more than $10,000 in property taxes, so they may benefit.” He adds a reminder: “Don’t forget that a shareholder’s share of the co-op’s mortgage debt is included in that calculation.” 

One group that is not thrilled by either proposal is realtors. “By reducing mortgage interest deductions, the proposals could reduce the value of real estate because they make it more costly to borrow,” Esposito says. 

Another disgruntled party is New York Senator Chuck Schumer, a Democrat, who tells CNBC, “Both the House and the Senate bills would raise taxes on millions of middle-class families, particularly in the suburbs, while providing a huge giveaway to corporations and the wealthy.” 

And what about the expected $1.5 trillion the Republican tax cuts would add to the federal deficit – anathema to deficit-averse fiscal conservatives? “The argument by Republicans is that the $1.5 trillion increase in debt will be covered by growth in the economy,” Esposito says. “Most economists don’t agree with that.” Indeed, the fallacy of “trickle-down economics” was vividly demonstrated during the presidency of Ronald Reagan three decades ago. So what does Esposito believe about the changes that are coming? 

“I believe the upper-middle class will get hurt,” he says. “That’s me. I live in a nice area of New Jersey. I’m going to get hit to fund a reduction in taxes for corporations and the wealthy.”